USD/JPY: bulls need to regain 21-D SMA or risk slippage to cloud base support at 111.45

For USD/JPY, where does one start? Today's Beige book is probably the best place.

• Fed's Beige Book - Modest Reasons to Keep Raising Rates

There was something for everyone in this report, but what stands out the most are the risks of higher interest rates to not only the wider global economy and specifically EMs, but right at home - to the US economy.  

"The Federal Reserve has been candid that its rational for tightening rates is not from a fear of an overheating economy or rising inflation. The governors see a need and desire to ‘normalize’ rates in the context of a future recession. That project remains firmly on track," 

- Joseph Trevisani, Senior Analyst at FXStreet.

However, it is evident that higher rates are having an impact on key sectors of the US economic system - (Today, Fed's Kaplan said that there are 3 more interest rate hikes that are 'likely'). 

We have been given some telltale signs of late in the housing market and today's was a testimony to the fact that this sector is problematic for US growth. Prices are already toppy and unaffordable to many despite strong wages growth and the risk is that wages stagnate and prices and interest rates continue to rise. Indeed, the report showed that rate sensitive sectors are already being hit and we also heard from manufacturers today who have started to complain about how tariffs are pushing prices higher.

The dollar gave back some ground after the release of the Beige Book and so too did the US 10 year benchmark, falling from 3.13% down to a low of 3.09%. It is clear that there are questions over the dollar's stability on such risks while the US stock market looks to be in the makings of a snowball correction of a burnt out bull market - The DJIA has already completed the 61.8% Fibo retracement of the entire 2018 rally and what is concerning investors is that while the US could be on the verge of a slow down, there are not many other places to go and park their idle risk capital and that is where the Japanese yen comes into play.

The Yen repatriation effect

At times of great uncertainty, you have the Yen repatriation effect. Firstly, the Japanese own boatloads of foreign bonds, especially US Treasuries, and they need to hedge those by selling the dollar. This is also where the Japanese pension and hedge funds reel in overseas investments and convert back to the Yen, forcing USD/JPY lower as well which encourages the investor to get on board with the move, often mistaken as the 'flight to safety'. 

While equities are falling, we are seeing fixed income, (bond prices), going up at the moment as investors are moving out of stocks. That, in turn, is propping up the dollar and rates, but on such reminders that we got from the Beige Book today, that could quickly move out of fashion which is where USD/JPY bears will likely emerge in droves. However, we are not there 'yet' and the pair is holding in bullish territory still while above cloud support, which lies at 111.45.

Another factor that is propping up the greenback currently remains with trade wars. Those hoping for a solution from next month's G20 summit where Trump and Xi are tipped to meet and work on a solution could well be going home disappointed. Equally, the eurozone is far from stable and that too can encourage investment flows into the greenback while the US economy continues to produce solid data such as today's PMIs. 

USD/JPY levels

USD/JPY Technical Analysis: Bears keep the market below the 113.00 figure leaving the door open for a drop to 112.00 level

• Support levels: 112.15 111.85 111.60.
• Resistance levels: 112.90 113.20 113.50.

From a technical point of view, Valeria Bednarik, Chief Analyst at FXStreet, explained that the 4 hours chart shows that the early advance was contained by the 200 SMA, while the 100 SMA continues nearing the larger one from above:

Technical indicators head lower within negative ground, indicating that the pair could extend its decline during the upcoming sessions, particularly if the market's mood remains sour. The high set this week at 112.89 is a key resistance, with gains beyond it indicating easing selling interest."